April 24, 2007
Henry’s real ‘life extension’ challenge II
Distractions; falling behind; and the buy signal
The first part of this article, looking at the challenges and questions confronting trading advisor John W. Henry & Co, and its eponymous owner, appeared yesterday.
It’s not exactly last week that Henry started enjoying the fruits of his investment prowess, and he’s hardly the first investment manager to have time-consuming interests away from the golden goose. According to the JWH disclosure document: “Since the beginning of 1987, [Henry] has devoted, and will continue to devote, a substantial amount of time to business other than JWH and its affiliates.”
His heavy-duty distractions did not begin until he became involved in major league baseball, although he had earlier owned a minor league franchise and was involved in a failed venture to secure an NHL expansion franchise in Florida.
Henry bought the Florida Marlins in 1998. After losing a bruising political fight over public financing for a new stadium for the Miami-based team, he upgraded to the Red Sox in 2002. His sporting interests expanded again last year, when he bought a 50 percent stake in the Jack Roush NASCAR team. Among his other ventures, apart from the Sirtris Pharmaceuticals stake: iRacing.com, set up to “create the world's most authentic, most sophisticated, most accurate PC-based racing simulations and grow a new branch of motor sport through real-time, online competition.”
Despite these distractions, he still keeps a close eye on the goose.
According to the disclosure document, “Henry oversees trading program design and composition, reviews and approves research and system development proposals prior to implementation in trading, reviews and approves of decisions involving the strategic direction of the firm, and discusses trading activities with trading supervisors.”
That’s a lot of hand on the helm for an owner who spends “a substantial amount of time” not merely off the bridge, but on different ships in far oceans. An obvious due diligence concern, and given Henry’s past achievements as one of sector’s great innovators, probably a substantial contributor to another longstanding question in JWH’s record.
Falling behind the crowd
Even before its current sustained performance decline, JWH had largely missed out on the asset eruption in managed futures, specifically, and hedge funds, generally. The 25-year-old business comes from the same generation of managers as Bruce Kovner’s Caxton Corp, Paul Jones’ Tudor Investment Corp and Louis Bacon’s Moore Capital Management, all of which, despite regularly returning capital to investors, now have assets in the $10 billion range.
But those firms have diversified far from their ‘managed futures’ roots, into equity markets and a plethora of other financial strategies. A more valid comparison is with Baltimore-based Campbell & Co Inc, which, like JWH, has stayed true to its roots of trading global futures markets using medium- and long-term trend-following strategies. Like Henry, it has a long-standing relationship with Merrill Lynch. But Campbell now runs over $12 billion—nearly 10 times Henry’s current assets—with $10.3 billion of that in its long-running FME Large portfolio.
Campbell offers other contrasts. Its senior leadership has been stable since founder Keith Campbell began withdrawing from day-to-day involvement in the mid-1990s. Bruce Cleland was named president in 1994, and chief executive in 1997; when forced to step aside earlier this month to battle a recurrence of cancer, he was replaced by Terri Becks, chief financial officer for 16 years.
It has also, like other quant-oriented managers with long records of admirable performance—Jim Simons’ Renaissance Technologies and Man Investments’ AHL spring to mind—invested heavily in research, and aggressively promotes those efforts as a key component in its success. While their mileage has varied, with Renaissance a clear leader in the pack, none has come close to inflicting the kind of pain JWH has imposed on its faithful.
By contrast with its peers and competitors, the firm seems almost complacent.
“JWH generally has not changed the fundamental elements of the portfolios due to short-term performance, although adjustments may be, and have been, made over time. In addition, JWH has not changed the basic methodologies that identify signals in the markets for each program. JWH believes that its long-term track record has benefited substantially from its adherence to its models during and after periods of negative returns; however, adherence to its strategy may lead to prolonged periods of market losses and high risk,” according to its current disclosure document.
History supports that contentment. But the magnitude, and especially the duration, of the current decline now leaves JWH at a crossroads where the Mints and the Trendstats and other once-proud names diverge from the Campbells and the AHLs.
The putative buy signal
“It’s different this time” are the four most expensive words in investment history. And if it is exactly the same, Merrill Lynch Alternative Investments did its clients no favor by ordering its financial advisors to stop putting their clients into JWH products. The old saw was “Buy Henry when he’s down 20 percent, and buy some more when he’s down 40 percent, because there’s a new high coming.”
That buy signal is here. At Mar. 31, the 27-month decline in the Strategic Allocation program had reached 39.4 percent; its previous peak to valley drawdown, between May 2003 and Aug. 2004, was 31.7 percent. (Emphasizing JWH’s volatility, that program was profitable in both those years, making 8.4 percent in 2003 and 13.7 percent in 2004).
Financial & Metals, down almost 20 percent so far this year, is off more than 40 percent in a decline that began in Mar. 2004. Since inception, in 1986, it has returned almost 25 percent annualized despite having beaten that number just once since 1996; its largest decline was 43.6 percent, incurred over 15 months between Jul. 1999 and Sep. 2000.
Of course, it’s always tempting to take the other side of any Merrill call, especially one targeting its retail investors. But JWH faces a tough climb back.
Merrill’s decision will likely trigger additional redemptions as its financial advisors churn their clients out of JWH products. And, without those same brokers pounding the phones, that money won’t be easily replaced.
JWH’s principal response—“to pursue the development of lower leveraged programs and strategies”—has come late in the day. When markets do turn in its favor, the leverage cuts will slow the slog back to the new high that, historically, arrived so reliably. It’s also a trick that’s been tried before, with mixed results, when the firm turned down the volatility volume in an unlikely, and largely futile, bid to attract institutional assets.
Webster, for one, remains confident. Reviewing Mar. 2007, he said that “turmoil has the potential to be a positive development” as short-term market dislocations “can be a harbinger of a major shift in trends.” And April has surely, to date, been relatively kind, with the steady ramp in stock markets worldwide, and dollar weakness, providing conditions in which JWH can, in fact, excel.
Henry’s place in investment history is secure. A member of the Futures Industry Association’s Hall of Fame. A Lifetime Achievement Award from Alternative Investment News. When traders talk about the pioneers and the performers, his name still resonates, even if its long-term performance record speaks louder of past glories than recent realities.
But one month—and one that’s not over yet—is not going to answer the questions about whether Henry’s drive to excel still includes his investment business. Another round of blood-letting? Another leverage tweak? Not enough, it seems, to have satisfied one of JWH’s most important customers, and certainly not enough to restore the firm to its once undisputed place in the investment firmament.
John Henry’s Longtime Lieutenant Is Out
Hedge Fund Alert Apr. 11 2007
John Henry’s bid to manage the future
by Michael Peltz
Institutional Investor Aug. 1996 (via streetstories.com)
John W. Henry & Co Performance
John W. Henry & Co Monthly Commentary Archive
John W. Henry’s Wikipedia page
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